What are payment terms?
Payment terms (or terms of payment) can be defined in two ways. The first and the more narrow view is about the exporter/seller and importer/buyer agreeing to make payment a certain number of days after delivery of the goods. This involves the exporter giving the importer credit for the period in question (e.g. 30 days). Put another way, the exporter is giving the importer a term (or period) in which to settle the account, hence ‘payment term’. If there is no payment term, it means that the account must be settle on presentation (also referred to as ‘on demand’).
The second way of defining ‘payment term’ is a little broader and essentially refers to the payment conditions which cover not only when payment will take place (that is, on what date – this covers the more narrow definition of ‘payment term’ which we discussed above), but also addresses certain conditions that must be fulfilled, such as:
- The method of payment
- The amount to be paid
- The place of payment
- The method of remittance (i.e. how payment will be made)
- Responsibility for the costs related to the payment (e.g. who pays which cost such as the banking charges)
Note that the terms of payment should not be confused with Incoterms. Incoterms relate solely to the terms of delivery for the buyer and seller. To learn more about Incoterms, click here.
More about methods of remittance and providing credit
In the case where the importer makes a cash payment for your goods (such as with cash in advance or with payment on on open account), there are several different ways in which the importer can pay the money over to you. These methods of remittance are discussed here. These methods of remittance are not really applicable in the case of documentary collections or documentary credits as in these instances there is already a defined method of payment within the banking system.
In the case where you allow the importer time in which to pay (i.e. a payment term or credit period), you need to think this through very carefully. Offering credit is a complex, risky and costly exercise. Before you decide to do so, you should read more about credit terms by clicking here.